Hog production looking bearish, cattle bullish

October 24, 2017 11:13 AM

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Lean Hog Fundamental Support

New highs were reached in hog during yesterday's move. For the February - June contracts this was also a new contract high. But we won't call today's move bullish. Hog futures ended the day at the very low of their price range. For the December and February contracts, higher highs and lower lows made an Outside Day that closed lower. This does not mean we can confirm a top here. It does show a little weakness here after what has been a strong two weeks.

The monthly Cold Storage report was bearish. 616.312 million lbs of beef were counted at the end of September. This was over the 596.0 trade estimate (ALDL 592.8). Compared with the end of August, stocks rose by 41 million this past month. That was over the 21 million five-year average increase. This was the largest September increase in five years.

We have talked about our expectation for lower prices into November based on higher supplies and lower demand. That transition may be going on right now. Mid-October is often a slump in supply. That may be changing now. Demand is usually strong in October based on special featuring. That may be running out now as well.

We are still interested in working on speculative sales for the last chance down into later November.

Live Cattle Fundamental Support

It was not that surprising to see how well live cattle futures came back from the lower open today. Friday's report was bearish for the March through August timeframe as September placements were 13.5% over last year. But COF placements do not affect the "right now" situation.

The weekly summary of the previous week's cash cattle trade came in as expected. Last week's average live cattle sale was at $111.01, over the $109.45 from the previous week. The sales numbers were also respectable at 95,400 head of free market cattle. That was just under last week's very strong 97,311 from the previous week.

The weekly show list survey of feedlots showed a surprisingly large drop in this week's offering of market-ready cattle. Cattle feeders suggest a 19,500 head decline compared with last week. Allendale has noted in the past two weeks that supply was under the 648,000 head peak from four weeks ago.

Weight data shows feedlots are current. Both steer and heifer weights were 2.0% under last year in the latest week. Now we have a cut in show lists. It should be apparent that bulls have the supply argument in the short term.

Today's 2 p.m. Cold Storage report further adds to the bull side of things. USDA's monthly survey found 487.812 million lbs of beef at the end of September in the nation's frozen warehouses. That was under the 500.2 trade guess (ALDL 502.4). This implies only an 11 million lb. increase in stocks from August to September. That is the smallest number in five weeks. It was also half the normal 22 million lb increase.

Things are looking good for fed/fat/live cattle. Things are not doing as well for feeder prices though. The January contract dipped to its lowest price since September 18. Some would suggest it is confirming a bearish Head and Shoulders top. This comes even before discussing Allendale's key concerns. Normal seasonals suggest lower prices ahead. Additionally, it is still unprofitable to buy these new cattle.

We remain very slightly bullish with an expectation of $124 eventually for the April contract. We are not interested in chasing the cattle market and will buy a good dip. 

About the Author

Rich Nelson is Director of Research at Allendale, Inc. in McHenry, IL. Allendale is registered with the CFTC and NFA and is a member of the NIBA. www.allendale-inc.com.